How to Manage Your Money as a Freelancer

By Adam C. Uzialko, Writer March 19, 2018 04:00 pm EST

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Credit: WAYHOME studio/Shutterstock

It is a fact of life for freelancers that income ebbs and flows. Unfortunately, this often means it can be difficult to plan ahead, and freelancers might find themselves running thin when work is not abundant.

"Freelancers must be extra money-savvy, as they aren't guaranteed a minimum amount of cash," said Chelsea Hudson, senior public relations officer at TopCashback. "Aside from tracking your spending, cut cost by eliminating wants, and only focus on your crucial living expenses."

Statistics show that the gig economy is growing, which includes freelancers and independent contractors. For this group, managing funds and maintaining a healthy reserve is essential. Business News Daily spoke with successful freelancers and personal finance experts about what it takes to manage your money with an uncertain income. Here's what they had to say.

1. Establish a reserve liquidity fund and manage your credit.

It's important to make sure your savings are not only robust, but also accessible for when money gets tight. Relying on income alone, or savings that are inflexible and hard to access, could leave freelancers without a reserve pool to draw from if the pace of work slows down.

"Sock away what you can for the lean months and keep your savings fairly liquid," said Kelly Hayes-Raitt, author of "How to Become a Housesitter: Insider Tips from the HouseSit Diva." "Keep your credit score high and credit card balances low so you can borrow on the cards during lean times, but be sure to pay them off completely during flush times."

By adeptly managing a liquid reserves fund and available credit, freelancers can easily weather the storm of slow business cycles while waiting for things to pick up again. Ideally, credit should be used as a backup to the reserves fund; that way, you won't be borrowing to maintain your standard of living. Instead, aim to put away additional cash in your reserves fund while business is booming. It's wise to hold your reserves separately from your long-term savings as well.

"As a freelancer, having a strong savings account is crucial to help cover unexpected expenses and large tax bills," Hudson said. "The best way to save as a freelancer is by setting aside 10 to 15 percent of your average income toward your emergency fund."

2. Keep your lifestyle expenses down.

There's nothing wrong with living a little when business allows, but living your best life doesn't mean spending the most money. You can prepare delightful meals for yourself or enjoy wonderful outings that don't break the bank and allow you to save more, in good and bad times alike.

"Find ways to do things or buy things without spending a fortune," said Marilyn Anderson, author of "How to Live Like a Millionaire When You're a Million Short." "Don't buy something for full price when you can find it cheaper. Comparative shop. Wait until things go on sale. Ask stores if they price-match. Negotiate."

Anderson offered a slew of other tips from her book, including purchasing home decor and clothes from thrift stores, minimizing the things you own by buying and selling regularly, and renting items when you only need access to them for a short time.

3. Put pen to paper ahead of time.

When your income isn't fixed, it's important to regularly plan and replan to make sure you stay on top of your cash-flow situation. Without a constantly evolving understanding of your finances and expectations, it will be impossible to manage your expenses and savings successfully.

"It's all about planning. Specifically, as a freelancer, you have to be acutely aware of your budget and spending habits," said Neel Somani, owner of Bay Area freelancing company Apptic.

To ensure more regular cash flow, you can negotiate with your clients ahead of time and require a deposit before work begins. Somani said it is common for freelancers to be shorted or ripped off entirely by unscrupulous clients, and a deposit secures at least partial payments. It also provides more liquidity, increasing your latitude to plan and spend on priorities.

"Break your payments down into smaller, more frequent chunks," Somani said. "For example, I typically have clients pay me half of the total amount before I start the work, and half afterward. I can imagine some freelancers break it down even further."

4. Don't be afraid to find additional work.

Part of the attraction of freelancing is the freedom it gives you to make your own schedule and be your own boss. That said, sometimes finding another job on the side could provide an infusion of cash, as well as some valuable experience that boosts the effectiveness of your freelancing work.

"Create multiple streams of income," said Michel Valbrun, CPA and financial expert. "Sometimes you have to bite the bullet and just pick up another job. I wouldn’t recommend picking up any job, but find a job that may be complementary to your business. For example, if you are a financial planner, picking up a tax job on the side is worth considering."

Not only will working in a complementary position help shore up your finances in a tight spot, but it will contribute to your personal and professional growth as an expert in your industry. Besides, it never hurts to pad the resume when you're trying to sell your freelance services to new clients.

For freelancers, properly managing your money really comes down to knowing your cash flow, managing your expenses, planning ahead and developing alternative revenue streams. If you're able to stay flexible, then it should be no trouble making it through the leaner times. Maintaining these best practices when business is booming will help you become even more successful in working for yourself.

Adam C. Uzialko

Adam C. Uzialko, a New Jersey native, graduated from Rutgers University in 2014 with a degree in Political Science and Journalism & Media Studies. In addition to his full-time position at Business News Daily and Business.com, Adam freelances for a variety of outlets. An indispensable ally of the feline race, Adam is owned by four lovely cats.